The Outlook for Healthcare in 2020 After Latest Obamacare Ruling
With impeachment and the 2020 Presidential race dominating the headlines, it is easy to miss significant news. Earlier this week, an appeals court ruled that the individual mandate, a core part of Obamacare, was unconstitutional. That upheld a lower court ruling, but they rejected the idea that this meant that the whole law would have to be repealed. That was seen as a positive for healthcare stocks, but that bullishness rests on a couple of questionable assumptions and, going into 2020, the sector may be a risky place to be.
One of the most remarkable things from a market perspective about the healthcare debate in the U.S. is how little it has affected stocks in the sector. There is and has been a lot of talk about revolutionary changes to the system, but somehow companies in the space always seem to come out okay. Publicly, both insurers and hospital operators have had a lot to say about Obamacare since it passed but the fact remains that most stocks in those industries have done extraordinarily well.
UNH, for example, was trading in the $30s when the ACA was passed and is now close to ten times that. Hospital operator HCA hasn’t done quite as well but is now roughly five times the price it was then. Clearly, despite all their complaining, Obamacare has worked for most healthcare companies.
Wednesday’s ruling was seen as a boon for healthcare stocks because it left the door open for Obamacare to remain on the books, albeit in a somewhat modified form, but two important questions remain. Firstly, can the law survive without the mandate and secondly, can it survive the politics of 2020?
The answer in both cases is likely to be no.
Insurance is basically a pooling of risk and claims are paid from the money received from those that don’t make a claim. Without any kind of mandate, it goes without saying that those with much lower risk, in this case the young and healthy, will not be incentivized to pay in, leaving insurance companies with the prospect of lower income and higher payout ratios.
Politically too, there is still significant risk to the sector.
The case that the appeals court just decided was brought by several Republican states and backed by the Trump administration. It is reasonable to assume that if Republicans win in 2020 at a state and national level, the attempts to completely overturn the law will at least continue and probably intensify. Whether or not you think this is a good or bad thing, the fact remains that healthcare as a sector is up 227% in the ten years that Obamacare has been on the books. Do you really think it will do better without it?
So, there are risks if Republicans prevail, but the outlook is no better if there is a blue wave next year. Two front runners in the Democratic primary, Elizabeth Warren and Bernie Sanders, have embraced healthcare plans that basically include doing away with private insurance. Even most of the moderate candidates who reject that idea are in favor of a public option which would result in significant competition for private insurers. Most have also made some kind of statement about reigning in costs, which doesn’t bode well for providers and hospital manager's profits, and pharma companies are a frequent target from both sides of the political divide.
In short, it is hard to see a good scenario for healthcare in the near future. The strongest bull argument is that, as has happened in the past, all the big talk, whether of a public option, Medicare for all, or repeal of Obamacare will actually result in just tweaking the existing system. In the current polarized environment though, where appealing to the base is far more prevalent than compromise, that seems like an incredibly risky thing to bet on.
Healthcare has had a good run, but the political reality suggests that it is coming to an end.
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